When is a Bargain Priced Home NOT a Bargain?

Bargain priced homes do not always make good investment properties. Did you know you can buy a 3 bedroom single family home in Detroit, Michigan for less than the price of a new car they used to manufacture there? $25,000 and it’s yours.

Bargain Priced Homes in Depressed Areas

The problem with buying in a seriously depressed area like Detroit is that the crime rate is high in most parts, not to mention a lot of homes sit vacant and there are not enough jobs to fuel the demand. City services such as police, fire and education are dependent on revenue from the property taxes they collect. With a 50% vacancy factor, it makes it difficult if not impossible to afford payroll for adequate police and fire protection, let alone money for infrastructure repair.

All of this leads to blighted neighborhoods with no money for street repair, park maintenance, etc. With limited job availability comes low paying jobs, causing the residents to have a difficult time affording to buy or rent houses at any price.

Banks can even become unwilling to lend in these areas. It becomes a high risk investment because you may not be able to rent it out after purchase. Bottom line is, when an investment looks low in price, it is not always a good investment. Will Detroit recuperate over time? Probably, but the question is how long will it take? If your dollars were invested elsewhere, could you actually get a better return on investment even if you had to pay more? The answer is most likely yes.

So much is tied to employment rates and the general health of the local economy. When doing an analysis of an area for investing, the starting place should always be looking at the trend in unemployment and job growth, followed closely by quality of schools, crime rates, etc. The crime rate in Detroit is among the highest in the nation. Vast areas of the city are in a state of urban decay. In 2013, Detroit filed the largest municipal bankruptcy in U.S. history, unable to pay their existing debts.

Do your homework

Detroit is not alone in this problem of urban decay caused by reduced property tax revenue. Many parts of the mid-west referred to as the “rust belt” are in the same boat. It is a very difficult thing for a city to dig out from under a staggering debt load with reduced property tax revenues. Before jumping on one of these bargain priced homes, do your homework. What is the rental market like after purchase? What is the vacancy factor in the area? How long will it take to rent out? How long might it take to sell? What is the quality of the schools? What is the crime rate? Is the area on upswing or on the decline? Many of these questions can be answered by looking at the quarterly unemployment trend for the area. If you are unsure about an area, consider flying there for a firsthand look before buying. If you are not comfortable walking down the street at night, perhaps you should invest elsewhere.